Global convergence through IFRS – Part I
As businesses across the global village converge to utilize their synergies, one of the important step towards uniform business practice and transparency is to bring standards around financial reporting and accounting. International Financial Reporting Standards (IFRS) is the path towards these common standards.
In this blog series, we would share the following insights around IFRS and enable discussion around this topic among our Business Process Experts.
- History of IFRS and why/how it came into existence
- Basic principles of IFRS
- IFRS roadmap by different countries
- List of IFRS
- IFRS deep dive on standards
- Significant differences between IFRS and country GAAP e.g. US GAAP
- How IFRS is enabled in SAP products
- How should your company plan for IFRS adoption
- What global opportunities exists for IFRS consultants…..and more
1. History of IFRS and why/how it came into existence
The history of IFRS gained momentum when European Union decided to make IFRS mandatory for all listed companies in member nations from 2005.
The important reason for this convergence is to make sound business sense.Increasing proliferation of financial products across the globe has made it challenging for the controllers, auditors and business heads to follow different standards for different countries especially when they are looking beyond their country of operations. There was a need to find a Global financial reporting infrastructure.
Global standards would allow standardized training and assure quality of work on a global scale. In this most demanding days, flow of capital would be more free if central banks are assured of the standard financial practices that exists across the globe. Another goal of these standards would be to discourage people to adapt workarounds just to adapt to a particular rule based standard such as US GAAP to more a principles based standard such as IFRS. For examples some of the contract companies in US arrange for long term leases as operating lease even though they are actually capital lease, just to satisfy US GAAP. IFRS would likely make these more transparent and allow the flexibility for the enterprise to decide.
2. Basic principles of IFRS
Objective is to provide information about the financial position, performance and changes in the financial position of an entity that is useful to a wide range of users in making economic decisions. They are built with an underlying assumptions of accrual and going concern
Qualitative characteristics
- Understandable – Easy to understand, broken down into various groups
- Relevance – In the business context
- Reliability – Should be accurate
- Comparability – To be comparable with previous years
Elements
- Assets, Liabilities, Equity, Income and Expenses
More to come in the future blogs….
Presently the Published Financial statements of a compay conform its country specific GAAP.
In a classic MNC this has been an obstacle in comparing the performance of -group-companies pertaining to two different countries,as they have flavor of their country specific GAAP.Consolidation is another issue.
IFRS is helpful in overcoming these problems.Albeit the implementation of IFRS is fraught with problems,issues....
In countries like India,the Indian GAAP is more or less a clone of IFRS,the transition is not going to be a major problem.On the other hand for countries like US the transition seems to be complex.
At present the country specific GAAP is more or less is in sync with the local laws,rules and regulations.While transitioning to IFRS,if IFRS happens to be inconsistent with some or all provisions of the local laws etc,am afraid the full transition [ to IFRS] may not make any sense;as much we may witness a phase wise transition.Remember,the local laws are driven by the socio,economic,political forces-not by IFRS or else.The local accounting bodies too will have limitations in influencing the State to amend the law,rule etc in time. In such case We will have to defer the transition [either in part or full] till the local state amends its law,rule....
There are other complications like Goodwill calculation etc.
My 2 cent...
Thanks Muthu for embarking on this topic.
Regards.
Ramesh
Thanks for your insights. The intent of IFRS is to get local laws with respect to accounting and financial reporting, to be made uniform across the globe. That is where the countries are signing up to IFRS and putting across a roadmap, which i will discuss in future blogs.
Regards
Muthu
We will be addressing around how SAP products will allign to IFRS. Over the course of the blog series we would get information out to you on how SAP would enable IFRS. Stay tuned
Muthu